Two weeks ago I featured the benefits of the USDA Rural Housing Loan, which is a very good loan with 100% financing. However, this loan limits its’ availability to those buying houses in areas deemed eligible by USDA and those who are under certain income limitations set forth by USDA.
Last week I discussed the FHA loan which used to be a good option for those seeking a low down payment. However, recent changes have increased the cost of the Mortgage Insurance (MI) that FHA charges and for the most popular FHA loan, the 30 year fixed rate loan with 3.5% down, the MI is now charged to the home owner for the full 30 years of the loan; it does not drop off after a period of time like in the past. The FHA loan has now become a very expensive loan because of this MI change.
Good news comes in another good low down payment loan program, the Conventional Loan with 3% Down Payment. This loan does not have any up-front MI whereas FHA charges 1.75% that is added to the loan amount financed. Even better is the monthly MI, which is priced on a comparable or better rate than FHA.
- The FHA 30 year fixed rate loan with 3.5% down, charges MI for the full 30 years of the loan.
- The Conventional Loan with MI allows the MI to be removed at any time the loan to value reaches 80%, and it automatically drops off when loan to value reaches 78%. Best of all there is no minimum time period that it must be charged.
The example below compares a 30 year fixed rate FHA loan with 3.5% down vs. the Conventional loan with 3% down.
Despite the fact that it has a lower interest rate, the FHA loan has a higher APR and costs $19,251.20 more due to the MI being more expensive and charged for 30 years. Once the Conventional loan reaches 80% loan to value the home owner can request the MI be removed. It automatically drops off at 78% loan to value. (All numbers are estimates. This example does not include property taxes and home owners insurance)